More stringent emission norms, set to kick in by 2015 for two-wheeler makers, seem to be one of the reasons why Honda opted to end its 26-year-old alliance with the Hero Group.
The new Bharat Stage IV norms, to be imposed across India for two-wheelers by then, would be very different from the Bharat-III ones enforced today.
Manufacturers are supposed to make technical changes to their vehicles accordingly. While the norm for two-wheelers was upgraded to Bharat Stage (BS)-III from BS-II, it was upgraded to BS-IV in select cities for cars and SUVs, earlier this year.
Industry sources say Honda and other global two-wheeler makers are investing heavily on upgrading technology to comply with new emission norms in different parts of the world. While the Indian two-wheeler market will move to BS-IV (corresponding to Euro-IV) in 2015 ,the European region will be upgraded to Euro-V in the same period. The step is aimed at reducing pollutants significantly, as over 15 million two-wheelers are expected to be sold yearly from 2015 onwards in India.
V G Ramakrishnan, senior director, Frost & Sullivan, said, “Honda knows better fuel injection systems are required to meet the next level of emission standards in India. The company has invested heavily in making its products more fuel-efficient. This technology could not have been shared with Hero Honda.”
Already, concern was being raised by many shareholders, including institutional investors of Hero Honda, regarding higher royalty payments to Honda Motor Company. Increased sharing of technology over newer emission norms would have meant greater royalty payouts.
“Royalty was a key issue with Hero Honda because this impacted profitability of the company. Hero Honda's strength in maintaining margins could definitely have been challenged if Honda continued with its high royalty charges,” stated an analyst from a Mumbai-based brokerage firm.
An email to Honda Motor Company, seeking clarity on the deal and the proposed effect of enforcement of new emission norms, was not answered at the time of going to press. The new norms will pose a challenge to the Hero Group, which is now looking to develop its own research and development wing.
Hero Honda is India’s largest maker of two-wheelers. It was unable to upgrade its range to BS-II from BS-II in time for meeting this year’s March 31 deadline, forcing the government to extend the time-limit for implementing cleaner emission norms for two-wheelers across the country.
The company's largest selling brand, Splendor, was running on a BS-II engine until April 1. The company upgraded it to BS-III only in June, after road transport offices refused to register the motorcycle.
“Honda’s ability to develop products suiting Indian conditions remains very high. Post the JV split, Honda can now get more aggressive in the entry and executive segments. This would result in increased competition for all players in the Indian market. The domestic two-wheeler market is expected to maintain its growth momentum over the medium term and pricing pressures may not be high, despite increased competition,” said, Manish Kedia, analyst from Icra.